Is your business too worried about Amazon?

FOMO never fails

Fear Of Missing Out. The business version of peer pressure. You feel you need to get on, or copy, Amazon because everybody else is. History is littered with downsides of FOMO. (See: every stock market crash ever.) It’s hard to catch a wave when everybody else is trying to ride it too. (Ironically, a Jeff Bezos aphorism.) You just have to look a bit harder for examples of this, because they aren’t as sexy news wise. Sure, sometimes you need to get on board with a trend, but many times you don’t. If you do, you rarely have to rush.

There is a Chinese restaurant a few blocks from me. They’ve been around almost twenty years, despite being in an area with incredible turnover. Yet when I pick up from this Chinese place, they still tally my order with a handheld calculator. Low overhead with limited novelty can beat high overhead with lots of novelty.

Remember when everybody had to get on board with ebooks and selling online? Ebooks have plateaued at 30% of book sales. Hence, Amazon has opened…gasp…physical book stores! 13 of them, and counting!

Amazon has also gotten into the…grocery, and convenience, store businesses

Amazon regularly does pop-up shops (a different version of a physical retail store)

Record sales are on the rise. Records! Those black discs!

Just because a business might get cut into doesn’t mean it’s going to disappear. The music industry has been irreparably changed, but nobody says music is dead,

Too often an announcement of Amazon getting into a business gets equated with “SUCH AND SUCH BUSINESS WILL BE DESTROYED BY AMAZON!!!” Has Amazon killed any business? Borders is gone, but Barnes and Noble isn’t. Amazon, and the internet, has been around over 20 years, “BRICK AND MORTAR RETAIL IS DYING!!!” yet ECommerce makes up like 9% of all retail.

Jeff Bezos is playing a different game

It’s hard to make a case Amazon cares much about suppliers. You can see grave regret amongst many who’ve gotten involved with them.

In a typical business relationship, such as supplier and distributor, there is a win-win relationship going on. Or at least an attempt at one. Amazon does not operate this way. Their first priority is always low prices. They will go to ruthless lengths to pull this off. They don’t care if it hurts your margins. Bezos only cares about Amazon’s size. Lower prices = more potential customers. Amazon squeezed Diapers.com by operating at a hundred million dollar loss over three months, where Diapers.com ended up caving.

Yes, others like Walmart might squeeze suppliers too. (We’ll get to them.) However, when you sell at Walmart, you don’t concurrently have a fear whatever you’re making, Walmart will use all the sales data you’re essentially giving them for free, then turn around and make that product themselves. They’re not going to become a competitor. Amazon does this, so they can cut prices. Did you know they have at least seven clothing brands? One reason they bought Whole Foods is because grocers were using Amazon Web Services. They have a lot of grocer data. You know a wolf in the henhouse isn’t a good idea, so don’t voluntarily let them in!

Bezos does not pull a salary from Amazon. They don’t pay a dividend on their stock. Whether they make a profit is, in a large sense, irrelevant to him. All his money is from stock, which has been removed from reality. A typical price to earnings ratio for a stock is 15. An investor is willing to pay $15 for every $1 of earnings. In ’99, before the dot-com crash, the average P/E ratio was about 45, one sign stocks were overvalued. Amazon routinely sells north of 200.

-> I think this is why many have begun to follow / obsess over Amazon. Other executives see Amazon’s stock price and get jealous. Ironically, that perpetuates their high stock price through excessive media exposure.

He’ll never say this but his goal is to pump that stock price as high as possible so he can use it to fund his space company. He doesn’t care about retail one iota. He knows he can barely make any money, yet miraculously, be worth billions. His only reason for starting Amazon was to make enough money to make rockets and go to space. That’s why he first worked on Wall Street. A place whose sole purpose is to make money. Bezos’ high school valedictorian speech was all about going to space.

Many get into retail because they enjoy an industry. My girlfriend works in beauty. She genuinely enjoys haircare, makeup, talking about different styles and trends, wants certain businesses to do well. Amazon doesn’t care about any of it, for any industry. He doesn’t care about your brand, the quality your customers are used to, the nuances of selling a luxury item or a service rather than a commodity, the fact you need a margin to survive. For fuck’s sake he doesn’t want to pay for AIR CONDITIONING IN A FACTORY IN THE SUMMER! He’d rather haul off his employees in ambulances. That way employees foot the bill.

That’s why Amazon is notorious for letting counterfeit items on the site. Customer gets stiffed with a crappy counterfeit? They don’t buy your brand again, but they will go to Amazon again. It’s also why, in Amazon’s entire history, they haven’t had a single high end product do well. A product that can compete removed from low pricing. (Size, irreverence, going a mile wide rather than a mile deep, can be a weakness.)

Which is fine. Bezos has a hell of a mind, but you need to know what his end-game is. Even Elon Musk, a guy whose ambition has no bounds, will tell you,

“I do think Bezos has an insatiable desire to be King Bezos. He has a relentless work ethic and wants to kill everything in ecommerce. But he’s not the most fun guy, honestly.”

Nor is there anything wrong with low priced items. (I sell some myself.) Being low priced can be a sign of efficiency. But anybody who has been in business knows it’s different in every way.

-> Bezos has had an extraordinarily hard time getting his rockets -high priced items- to work. It took Musk six years. Bezos has been at it eighteen, still with no profit.

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Do you worry about Walmart?

Amazon is the digital version of Walmart: sell everything at the lowest price, no matter the consequence. There are nuances like above that need to be accounted for- Bezos has an ego Walmart does not have.

As in all big egos, there is an element of delusion. Few, if any, companies can make multiple product categories superbly. Another reason Amazon’s Fire phone failed. (How many even know they made a cell phone??) It’s why Google’s social media, Google Plus, despite endless capital, failed. We often assume there is low hanging fruit when we’re an outsider to an industry. We don’t know all the tradeoffs a company has made, how far ahead they really are, how hard making / selling a certain product truly is, how much actually caring about what you’re selling matters.

Think of it this way- if Walmart announced it was going to get into your business, would you freak out? If your Porsche, do you give a shit if Honda says they’re going to make a sports car?

A lot of Amazon fear revolves around their revenue growth:

Amazing. But, um, have you looked at Walmart?

“During the last 20 years, from 1995 to 2014, Amazon has generated a combined revenues of $409 billion. This means that if we add Amazon revenues for all the years from 1995 to 2014, the total would be $409 billion. In contrast, Walmart generated $486 billion in 2014 alone.

During the last 20 years, from 1995 to 2014, Amazon has generated a combined net profit of $1.96 billion. This means that if we add Amazon net profits and losses for all the years from 1995 to 2014, the total would be $1.96 billion. In contrast, Walmart generated $16.18 billion in 2014 alone. So, Walmart generated eight-times more net profit in 2014 than what Amazon could generate during the last 20 years.”

There is a notion Amazon has so little profit because they put all their money into future growth. Nonsense. Over their first 20 years, Walmart added almost six Amazons to its revenue! While generating nearly the same –positive– profit margin every year. That type of revenue growth is incomprehensible.

-> For those who haven’t run a business, think of low priced sellers like low priced buyers. We all know people who refuse to shop unless it’s on discount. There are also businesses who can’t sell without racing to the bottom.

-> Are we even sure Amazon or Walmart are disrupting anything? Or did they luck into riding an economy washing away its middle class? Do you think Dollar Tree is disruptive? Cause they’re raking it in too-

-> Amazon does not make money on most of the businesses they’re in. Their playbook: undercut competitors on cost to acquire market share, using revenue from Amazon Web Services to overcome the loss, their main profit driver, not retail. Yes, monopolistic, but this can’t last forever. The web services game is getting very crowded. This isn’t something most can, or should, try to emulate.

In 2018, why is everybody scared of the hundred fifty billion dollar ant rather than the five hundred billion dollar whale?

And Walmart has invested heavily in ecommerce. Remember Diapers.com? Yeah, the founder still isn’t too happy. He’s partnered with Walmart to go after Amazon.

The majority of businesses don’t care what Walmart is doing. We know what their M.O. is, and we’re not interested in participating. (If you are, it’s clear what you’re getting into.)

-> Also very under appreciated / not as clear until later on: the type of customers you get when you cater to a low-priced-obsessed-crowd.

If nothing else, you need scale to compete on price. 99% of businesses are small. They don’t have scale => they don’t compete on price.

Many of us don’t need to pay attention to Amazon either. One of the beauties of business is you don’t have to compete with someone. Take a page out of Apple’s book.

“Oh, look, another iPhone competitor, at a lower price. That’s cute.”

And then they price their next phone at a mortgage payment. You think they lose sleep over Amazon trying to make electronics? There’s more to life than market share. iPhones, which you can’t buy on Amazon, only have 15% smart phone market share, yet 90% smart phone profits. Screw revenue. Apple has $300 billion in cash. There are other games out there to be played.

If your Dick’s Sporting Goods, rather than worry about ECommerce, add to your store a batting cage, golf simulator, fifty yards of field turf so I can actually see what running in your cleats feels like. If you’re an independent book store, you don’t have to also do free two day shipping. Instead, you can have cats greet me at the door. Because just like you wouldn’t try to take on Walmart, you’re not going to out-Amazon, Amazon. Fortunately, you don’t need to.

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